Have you ever thought about the methods and strategies that are followed by banks and huge financial institutions that make consistent gains out of forex/stock market? You will be surprised to know that they seldom depend on indicators; instead, they focus almost entirely on what is called Price Action Trading. Why? Because they know that is where the crux of trading lies!
This article takes you through the whats and whys of the most promising trading strategy – Price Action Trading. But before we move onto that, let us compare average traders and smart traders.
Average Trader vs Smart Trader
An average trader always thinks about which indicator to use, which TV channel to watch, which data to be considered, which news to be followed, etc. Thus he has a lot of things to consider before making a trading decision.
However, the ugly truth is that all this is unnecessary and moreover a total waste of time! All these indicators and channel tips are based on the movement of price. It is the price that moves first. Indicators merely follow them.Hence, they are all lagging. More often than not, as you might have already experienced, by the time you execute a trade based on indicators, the price would have moved even further, and you will end up in a loss!
So, what makes a smart trader smart?
Well, a smart trader thinks how to outsmart all indicators – he learns that ONE THING that provides cues to indicators and thus outperforms them. So, before the indicators reflect, the smart trader knows what would happen in the market. And as goes the old adage, “the first man gets the oyster; the second man gets the shell!”
The smart trader, therefore, focuses only on one thing and hence has more clarity. In short, he is cool!
Now pause reading and think for a quick second – whose footsteps do you want to follow – the average traders’ or the smart traders’ ?? If your answer is the latter, then read on:
So, what in fact is price action trading in simple terms?
Simply put, price action trading is trading in stock or forex market based on clean price charts.
Now that brings us to the question – what is a price chart? Financial markets around the world create data regarding the upward and downward movement of prices of stocks, currencies, etc. These movements could be the result of government policies, psychology of market players, etc. Therefore, we can say that this financial data is the sum total of all factors influencing the market prices. These data are represented in the form of charts, called price charts.
Analyzing and interpreting these price charts and taking a trading decision on that basis is called price action trading.
Following is an example of a price action chart.
Having understood that, let us now move on to the next big question.
Why should one learn to interpret price action charts?
Forex/stock trading is all about making anticipations. You anticipate what is going to happen in the next moment/day/month/year(s) and execute your trade accordingly. This anticipation becomes easier when there is a pattern involved. And the good thing is that, human behavior vis-à-vis financial market also follows a pattern and these patterns can be identified from the price action charts!
So if you can identify a pattern, then you definitely can anticipate what is about to come. You can foresee if the price of a particular stock or currency is going to go up or go down. This makes interpretation of price action chart all the more important.
Now let us understand a bit more about price action charts.
Which type of price action chart should you use?
Basically, there are two types of price action charts – the ‘clean’ one and the ‘messy’ one.
A ‘clean’ price action chart shows only the price movement and nothing else. Look at the NIFTY 50 chart below; it is a clean chart and hence easy to interpret.
On the other hand, a ‘messy’ price action chart is one that shows price movement along with many other indicators. The presence of too many indicators and too much information makes it very difficult and confusing for a trader to interpret it.
Look at the same NIFTY 50 chart with indicators like Bollinger, RSI, MACD, and Stoch.
The average traders spend considerable time swapping between these indicators to find out a holy grail. But as the chart is messy and cluttered with indicators, they seldom get enough room to make their analysis and interpretations. One indicator would say buy while another one would say sell, resulting in total confusion. More importantly, this gruesome process takes away all the fun in tradingand makes it very stressful.
In short, price action trading involves…..
- No messy charts
- No confusing indicators
- No complexities
Now that we know which chart should be used for best results, we should turn our attention to the million dollar question, which is:
Howto interpret price action charts?
There are several methods of drawing conclusions from a clean price action chart. These are called price action strategies.
For instance, take a look at the image below. You can see high points and low points.
By analyzing the behavior and pattern of these ‘swings,’ we can anticipate what is going to happen next. Another method is to calculate the distance between these swing points to anticipate next price movement. One may also analyze the depth to which the price ofa security is falling down and anticipate future movements.
There are many such price action strategies that can be used to take right trading decisions and make handsome earnings. All these strategies can be learnt and mastered in a step-by-step manner.
Wanna learn to interpret price action charts?
Do you want to be an excellent trader and price action strategist?
If you want to do top quality trading, then you need top quality training as well. Trading is a skill; and just like any other skill, you need to be trained thoroughly before you get results.
At Mithun’s Money Market, we offer training on price action and such other advanced methods in a systematic manner. You may click here toenroll into our online or in-class training programs that we conduct from time to time. Change your destiny with price action trading!